How We Create a Budgeted Income Statement
How A Budgeted Income Statement Works
Management needs to prepare budgeted income statements for the month and the quarter. Based on the budgeted income statement, management sees if the sales goals will be met and if there are any places within the company that expenses can be cut.
Before creating the budgeted income statement, you’ll need to have created all the other operating budgets like the direct materials, direct labor, manufacturing overhead, and administrative expense budget.
How a Budgeted Income Statement Helps You
The budgeted income statement is a by-product of all the other budgets. The accuracy of this statement depends solely on the accuracy of all the other budgets.
The budgeted income statement lets a company know whether their financial goals are realistic or not. And when used hand-in-hand with your budgeted balance sheet, it’ll reveal unrealistic or unnecessary financial goals. Such as going into debt or getting out of it. Basically, it lets you know if your other budgets are accurate, which if they’re not, you need to go back to square one.
Let’s Start Preparing the Budgeted Income Statement
Jordan Gardner owns a Mexican fast food restaurant. He expects to sell 7,000 plates of food at $10 each for the month of June. The average cost to make each plate is $3.
The variable operating cost of the company is $2 per unit sold and the fixed operating costs of the restaurant are $10,000/month. The monthly interest expense is $4,000. The company’s tax rate is 30% of the income before taxes.
Find the Sales & Costs of Goods Sold to Get the Gross Profit
First, multiply the expected number of units sold by price per unit, $7,000 * $10 = $70,000. Then multiply the expected number of units sold by the cost of production, $7,000 * $3 = $21,000. Subtract the sales amount minus the costs of goods sold to get the gross profit.
Find the Operating Expenses Total Amount
To find the total amount for the operating expenses you need to multiply the expected number of units sold by the variable operating expenses for each unit sold, $7,000 * $2 = $14,000) and then add the fixed operating expenses for the month, $14,000 + $4,000 = $18,000.
Find the Operating Income
To find the operating income amount, you subtract the gross profit minus the operating expenses, $49,000 – $18,000 = $31,000. You use the operating income for the interest expense and the provision income tax.
Calculate the Interest Expense & Provision Income Tax
The interest expense is easy, that’s the flat rate of $4,000. The provision income tax subtracts 40% of the income before taxes. It looks like this, use the operating income and subtract the interest expense, $31,000 – 4,000 = $27,000. Then you multiply $27,000 by 30%, 27,000 * .30 = $8,100. That means, $8,100 is your provision income tax.
Finally, Calculate Your Net Income
To find your net income, you’ll subtract the interest expense minus the provision income tax from your operating income, $31,000 – $4,000 – $8,1000 = $18,900. Congrats to Jordan, she expects to make $18,900 in net income for the month of June.
Now you have an idea of how to do your budgeted income statement for the coming months. If you’re doing a budgeted income statement for your business, you’ll have far more expenses, taxes and budgets to consider. If you have questions, you can consult us about any part of your budgeted income statement.